Why Goldman Sachs Could Again Rule Wall Street
The surge in volatility since the election has reawakened hedge funds, which are Goldman’s core clientele
Wall Street’s “flow monsters” are suddenly looking less formidable.
So far, the post-Trump trading world seems to be rewarding everyone on Wall Street. J.P. Morgan Chase & Co., Citigroup Inc. and others are projecting double-digit increases in trading revenue for the fourth quarter, executives said at an industry conference last week.
But a postelection shakeout could loom, one that is more likely to benefit firms like Goldman Sachs Group Inc. Indeed, Goldman’s postelection share-price gains have outpaced those notched by J.P. Morgan and Citigroup by more than 10 percentage points. Goldman’s shares are up nearly a third since Election Day and are within striking distance of their all-time closing high of $247.92 reached Oct. 31, 2007.
One reason: the low-margin, high-volume “flow monster” model based on a steady flow of business from global corporations that has boosted Citigroup and J.P. Morgan “could be under pressure" in a new, more volatile trading world, said Mitchel Penn, a managing director in equity research at Janney Montgomery Scott. That has the potential to create new winners and losers, he added.
ENLARGE
Those likely to gain are firms more focused on hedge funds and active traders. Until the election, Goldman Sachs’s core clientele of hedge funds was less active amid low stock-market volatility and interest rates stuck near zero.
The surge in volatility since Nov. 8 has reawakened hedge funds, while protectionist views espoused by President-elect Donald Trump could dampen international trade. That would lessen corporations’ need for currency hedges and other products.
Opportunities in trading are shifting from a “stocked pond” where it’s easy to catch small fish to a new environment “all about trying to reel in the big ones," said Brennan Hawken, a UBS Group AG analyst. “That’s Goldman’s sport.”
That would bring things full circle on Wall Street. Hedge funds once powered big-bank trading desks. They paid high fees for tailored products that let them place big bets on, say, Japanese government bonds or Texas oil.
But the postcrisis period of calm made it harder to find an edge. Returns suffered and some funds curtailed their trading, which disproportionately hurt Goldman.
Among the five biggest U.S. trading firms, Goldman’s share of fixed-income trading fees fell to 14% so far this year from 21% in 2010, according to data compiled by UBS. Morgan Stanley, which also skews toward hedge funds, lost two percentage points, while J.P. Morgan picked up eight and Citigroup gained two.
Much of that growth has come from corporate treasurers. A spike in global trade and cross-border merger activity has sent companies in search of financial products to help manage risks.
These transactions generally carry low fees, sometimes just a few thousand dollars. But big global companies can do thousands each year.
Often, they turn to global banks like Citigroup and J.P. Morgan. These behemoths are already plugged in with corporate back-office officials and treasurers who shop for less-glamorous financial services—meeting payroll and zapping cash around the world.
Earlier this year, J.P. Morgan’s investment banking chief, Daniel Pinto, said the bank’s corporate clients were expanding to more countries and handling more real-time payments, increasing their needs for trading products like currency hedges.
Citigroup’s network operates in nearly 100 countries, collecting cash from retail stores in Indonesia and making sure British pounds can be withdrawn as Brazilian reals. Corporate clients generate more than 40% of Citigroup’s trading revenue in certain products, according to bank executives.
“While people often cite the declining industry revenue pool in [fixed-income trading], for us you really need to dig a little deeper,” said James Forese, who runs Citigroup’s institutional business.
But that environment could change. Mr. Trump’s election created pockets of uncertainty that have been fertile hunting ground for hedge funds. An expected rise in interest rates is also likely to open new opportunities for these clients to be more active.
Goldman, which gets about one-quarter of its trading business from hedge funds, could benefit. The firm had been urging its investment bankers to use their relationships with CEOs to refer trading business, and had shifted sales coverage to win more business from asset managers, according to people familiar with the matter.
The recent bounce in hedge-fund trading, however, has some executives rethinking the urgency of that shift, the people said.